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Ending private school tax breaks would raise £1.5bn for state sector

For a long time, the impact of private schools on the UK economy and society, particularly regarding their tuition fees, has been a subject of controversy.

Recently, the Labour Party proposed a series of policies to remove the tax-exempt status of private schools, most notably by subjecting their tuition fees to value-added tax (VAT) on income, with the revenue generated being used to increase spending on state schools. However, Rishi Sunak and his cabinet have roundly rejected this idea.

Currently, private schools, including Eton College, are exempt from charging VAT on fees due to their charitable status. In England and Wales, they also receive at least an 80% reduction in business rates.

The Institute for Fiscal Studies (IFS) stated that if VAT were to be levied on private school fees, it could raise £1.5 billion for the public sector, and raise an additional 2% of funds for the central. The IFS also claimed that removing tax privileges for private schools would not have a significant impact on the number of students.

According to a research report by the IFS, the average annual tuition fees for private schools in the UK, adjusted for today’s prices, was £15,200 in the 2022-23 academic year (after deducting scholarships and bursaries). This is £7,200 higher than the £8,000 spent per student in state schools (including day-to-day and capital expenditure), representing an increase of nearly 90%. The gap between private school fees and per-student spending in state schools has more than doubled since 2010, when it stood at approximately 40% or £3,500.

The proportion of students in British private schools has remained around 6% to 7% (approximately 560,000 to 570,000 students in England) for at least the past 20 years. Despite a 20% real-terms increase in average private school fees since 2010 and a 55% increase since 2003, this situation has persisted. Not surprisingly, private school enrolment is concentrated among the highest income groups.

‘We estimate that removing private schools’ tax privileges would generate around £1.6 billion in additional tax revenue each year. This is because the effective VAT rate would be 15% after allowing for input deductions (which may include VAT on boarding fees and exemptions for professional services), and it includes additional revenue from business rates. With a small-scale movement of students into state schools costing between £100 million and £300 million annually, this would result in net gains of £1.3 billion to £1.5 billion per year for public finances.’

Furthermore, research funded by the Nuffield Foundation predicted that if VAT were to be imposed on fees, the enrolment rate in private schools would decrease by 3%, down to 7% of the overall population. 

Luke Sibieta, a researcher at the IFS and the author of the report stated that ‘the conclusion of the report is that, in the short term, the impact may be very small, as few parents would choose to withdraw their children from primary or secondary school. However, in the medium to long term, the impact may be more significant’.

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